Created: 3/6/1987

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LitymV Lilllt Impad aJ'VS Satciioni^^

US economic sanctions agaimt Libya have hadimited impact onto acquire US toodi or substiiBte tecrusoiogieal goods, and aoon iu oil productioa or ability io use international bankingrapid deterioration of the Libyan economy in the but yew is attributablelow level of oil prices, tbeay war in Chad, and. *cvies* thaiby the majority of the popula-

with his revoluiion. Under the sa net tons, all direct trade, travel financial, and business transactions by US firms and individuals are proeibiied. All Libyan assets, including bank accounts, under the control of US aniens here or abroad are frozen. Bra use only "direct- transactions are prohibited, however, foreign companies are not compelled to cooperate: nor are foreign subsidiaries of US^

HAccording io economic press reports, moreUS corporations trade with Libya via foreign subsidiaries and/or affiliates.

Moreover, substitutes for US goods can often be found. Faced withepressed oil market, many oil equipment and service sellers are seeking business with Libya. Fun her. some procurers purchase goods and send them to third countries for re-export to Libya. Violation or evasion of tbe sanctions occurs when end user reports arc falsified. Sanctions, however, have had the impact of making some goods more expensive because procurers are selling to Libya at inflated prices and adding risk premiums to many invoices

Direct US-Libyan irade had already been severely reduced by three earlier rounds of US export restrictions. Official US figures put the value of direct trade al0 million between5 andhe economic press reports lhe value of direct and indirect trade was about SI billion between5 andhe reports predict the new sanctions will reduce lhe value5 million in ihc year ending inhe value will not fall much beyond that because Libya will stillemand for some US goods and will be able to rind suppliers of parts abroad BJJ

The volume of Libya's oil exports has remained essentially unchanged. There have, of course, been seasonal variations, and the new OPEC agreement has reduced Libya's production quota. We believe that Tripoli already has contracts to sell all of iu quota for at least the first halfs long as Libyan oil remains com-peliuvely priced, itwjll remain in demand because of iu high quality and location cleat- to


The Mtei freeze did cause Tripoli to And new banks. Libya now tends to deal with Arab-owned banks that are less likely than Western-ownedmpose freezes Locating new banks and shifting funds imposed some inconvenience, but have bad no significant effect on Libya'i esc of tnaacial markets.

Sanctions will probably have even less impact is the Deal year unless wider support iswe believe b> unlikely. Historically, economic sanctions have been most effective in the first six2 months. After that, alternative suppliers are usually found. Nonetheless, the economy will remain in badthe current higher level of oillone, as tbe war continues and Qadhafi retains bis view of domestic consumption. While lifting the sanctions would provide utile economic benefit, we believe thai Qadhafi wouldemovalajorfor US policy. He would claim removal demonstrated thatio iu policies was stronger (han US determination to punish bis country.

Libya: Oil Industry Weathering Sanctions I

The Libyan oil industry bas been able to cope so Tar with US economic sanctions, the withdrawal of US companies, and US diplomatic pressure on West European governmenu to reduce petroleum trade with Libya. The volume of Libyan petroleum exports in1lthough oil revenues plunged primanly because of tbe collapse of oil prices, US pressure contributed to the slide by forcing theto discount some oil sales. We estimate that US efforts cost Tripoliillion in sales Last year. West European and Asian companies, includingforeign subsidiaries of US companies,to provide oilfield equipment and services. Despite increased difficulty and the cost of obtaining some advanced technology and US-made computer parts, procurement difficulties have not caused mayorproblems- In the absence of much stronger West European support for US policies, the Libyan oil industry should be able to maintain exooru at current levels for the foreseeable tutu



Coping With Sanctions

Despite someurplus of productivebas helped enable Libya to meet iu productioncutnder tbe OPEC quota agreement.]

m^Libya could probably sustain maxi-mum production ofespite some deterioration in capacity over ibe last year.

services fromUSin Western Europe. || umber of newly industrialized cc^ntnesTicluding Brazil, South Korea, and Singapor

The effectiveness of US unctions bas been severely undercut by the widespread availability of essential petroleum equipment. Oilfield equipment prices areock-bottom level because of the depression ia the

andLibyans generally do not have major problemsmost equipment. In fact, many foreign firms regard the US sanctionsindfall and have filled in readily for departing US firms. In most cases, Libya can procure comparable equipment and

The Libyans have taken other steps to reduce the impact of sanctions;


Stockpiling critical spare pansumber of yearsrecautionary move.Tripoli also has set up foreign trading companies to jrocurc oil industry equipment.


or6 Morek iw

Impact on Oilfield Operation

Squeezing Liting Standards

Libia hoi experienced seme oeeretional difficulties resulting from the US pullout and sanctionseduction In investment caused by Libya's financial troubles. There have been reported shortages ofand production equipment and replacement parts for computers and electronic control equipment. In addition, some specialised service contractorshove pulled out or ore reluctant to work In Libya because of chronic payment problems.tsull, there is some shortage of qualified drilling personnel. The US embargo apparently has also forced Libyaremium for equipment and spare parts. I

we roughly

equipment embargo probably0 million to the3 million per year the Libyans spend on oilfield equipment spare ports.

Foreign Work Force

A small cadre ol* well-trained Libyan nationals control the top managerial positions, but the oil industry remains heavily dependent on foreign technicians. North Americans and West Europeans provide most of the technical and supervisory expertise and Asiansarge pan of tbe manual labor. Many foreign workers remain because of the high pay and rtuniiies for employment elsewhere.

Although the overage Libyan has had to endure severe economic disruptions since oil prices collapsed last year, current conditions art the worst to date. Domestic economic difficulties are being exacerbated by the cost of tht conflict inas much es SIOay. Nonetheless. Qadhafi appears unwilling to draw on the3 billion in reserves.esult, ike burden is apparently being borne by the Libyan population. I

jhortages in Libya, always very

uch as cigarettes, spare parts, gasoline, and natural gas also are in short supply. Moreover, what is available is of Inferior quality.esult, the black markti is rapidly becoming the principal source of most goods.


stringencies are hurling tht Libyan populace in other ways;

water is in short supply in the cities, while waste removal is sporadic and sanitary conditions ore extremely poor.

' Electricity in affluent lections of Tripoli is off for severaleek, while in lhe poorerit is often off for several daysime.

' Housing is becoming increasingly scarce because financing for new construction is extremely hard to find

' Education, the hallmark of Qadhafi's revolution, is suffering under budgetary cutbacks.

service salaries reportedly have not been paid since6 while military paychecks have not been distributed since October.

Libya: Estimated Petroleum

spile of US diplomatic pressure. West, European couniries accounted for about SS percent of Libyan petroleumto previous years:

and Bangladeshis in Libya. Technicians and workers from Communist countries reportedly do notajor role in the Libyan oil industry.

Petroleum Exports

Libyan exports averagedf products inthe same level as the previoussome swings in sales during the year. Nonetheless, Libyan oil revenues plunged from aboutillion5 to under SS billion6 because of the collapse in world oil prices. Exports reacheda high of moreast summer before dropping too conform with Libya's OPECceiling. Libyan exports rebounded in7 aboveevel in response to the cold snap in Europe.

Italian imports increased to moreriven by attractive prices and strong refinery demand for Libyan oil. Most was processed al refineries in Sicily and Sardinia specially equipped to handle waxy Libyan crudes.

* Spanish imports from Libya jumped dramatically during the summer as Spanish refiners maximized gasoline output for re-export. Libyan importsfell to traditional levels as Spanish refiners switched to heavier crudes for the winter heating season. .

Belgiumignificant new importer of Libyan crudeesult of tbe South Korean firm Daewoo's purchaseeligan refinery to process Libyan crude received in payment for construction work. French imports from Libya dropped6 as French Government-controlled oil companies ceased buying Libyan oil. I

The Soviet Union increased its liftings of Libyan oilto morealthough most was resold to refinersand Western Europe. Sales to Bulgariaalso rose, and Libya deliveredreater variety of Third Worldand North

fo; politicalvolumes were relatively small.

Marketing Tactics

Libya's sales organization, Brcga International,used special pricing discounts and netback deals to offset the loss of the us companies' previous role in marketing Libyan oil. These schemes enabled

Libya to limit selling on the tpot market, where prices for Libyan crudes consistently lagged prices ofcrudes by SI or more throughout muchu large pan because of US pressure on major US oil companies and West European governments to avoid purchasing Libyan oil Barter and countertradewith the USSR. Italy, and Southliftings by foreign equity crude producers also accounted for large shares of Libyan crude oil. Despite Libya's marketing success, we estimate US efforts to limit Libyan oil sales probably cost Tripoli

illion Last year, adding marginally to

Libya's already pressing economic difficulties. |

Looking Ahead

fourth quarter.

West European governments continue to show little inclination to join the US ban on petroleum imports. Barring further evidence of Libyan terrorist activity. Europeans will continue to buy Libyan crude and products as long as the Libyans are responsive to market price conditions. If prices remain firm tbb year and eiporu average, tbe dollar value of Libyan oil sales will rise to about S6 billion. Libyan oil is valued by refiners because of its attractive refining characteristics and iu premmny. In addition, equity crude offtake and debt repayment are powerful incentives to continue lifting Libyan crude. Customers bad to be turned away during the

Despite some recovery in oil prices6 levels, the most significant problem the Libyan petroleum industry faces continues to be tbe tow level of world oil prices- Lower oil revenues haveharp cutback in capital investment, reduced maintenance work, aad led to increased indebtedness to Foreign contractors. Underiavesiment in the petroleum sector could seriously restrict Libya's productive capacity by the end of the

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